SHALE GAS WILL CAUSE A SECULAR SHIFT FROM OIL TO GAS

April 10, 2011 § 1 Comment


High oil/gas price ratios will transform the petroleum derivatives industry

The recent unrest in the Middle East has caused a spike in the price of oil, with immediate impact on gasoline price, while the price of natural gas has remained stable.  This underlines the principal difference in these two essential fuels.  Oil is a world commodity while gas is regional. They also serve largely different segments of end use.  Consequently, the fact that today’s gas is one-fourth the price of oil in terms of energy content has little relevance in the main.  However, if the energy industry believes that this differential will hold for a long time, technology enabled switching will occur.  In this blog post, we will predict a shale gas enabled future of gas at low to moderate price for a long time.  At the same time, we subscribe to the view of an upcoming plateau in oil production, which will drive oil prices higher.  These two trends taken together assure a high oil/gas price ratio.  This will cause systematic switching where possible.  We discuss two essential areas where this is likely: transport fuels and propylene, the latter being the precursor to many important industrial goods, principally polypropylene.

Why natural gas price will stay low to moderate: Shale gas has unique economic characteristics when compared with conventional gas.  It is located on land and at relatively shallow depths.  The exploitation of the resource does have environmental hurdles, but with the proper combination of technology, transparency and regulatory oversight, these can be traversed.

If allowed to be accessed, shale gas offers the promise of cheap gas for decades.  If demand drives up price, this resource can be accessed within 90 days of the decision to do so, provided access and delivery infrastructure are available.  This single fact will keep a lid on the price and discourage speculators.  To give a frame of reference, conventional offshore gas has a lead time of at least four years.  That is the sort of lead time this industry is accustomed to.  So a fast response lid on prices is a new phenomenon, driven by this unusual new resource.

Natural gas prices can be expected to stay in a tight band between $4 and $6.50 per million BTU, with excursions to $8.  The floor will be driven by demand and the ceiling by the aforementioned fast response to new production.  At least two oil companies operating in the Marcellus in Pennsylvania have stated that at $4, they have strong profits.  Newer technologies and further experience will continue to drive down production costs.  One example is refracturing of existing wells after initial production tails off.  A unique feature of this type of reservoir is that a properly designed refrac will deliver new gas approaching initial production numbers.  This would be at a fraction of the original cost because the well already exists.  This and other technological advances will, in most instances, more than offset the costs of better environmentally driven practices.

Impact of predictably low gas prices: High oil/gas price ratios will drive oil substitution.  Here we will discuss just two areas of impact.  The obvious high volume one is a replacement of the oil derivatives for transport.  Technology exists today to convert natural gas to gasoline, diesel or jet fuel.  Predictably low cost natural gas will spur further improvements regarding the economics of these processes.  Also, Liquefied Natural Gas (LNG) for long haul transport and Compressed Natural Gas (CNG) for buses, taxis and even cars will be strongly enabled.

An interesting analysis is the impact on petrochemicals such as propylene.  One of the derivatives, polypropylene, is ubiquitous in our lives: roofing, carpets, bottles and bendable plastics, to name a few.  For years when oil and gas pricing was in greater parity, propylene was a bi-product of ethylene production in oil refineries.  It is also produced by tweaking the catalytic cracking process, at the cost of a smaller gasoline fraction.  A refinery can change the mix essentially at will, presumably based on the relative profit potential.

But with a worsening oil/gas price ratio, ethylene production increasingly switched to a gas feed stock.  Unfortunately, this process produces very little propylene as a bi-product.  So, as reported recently in the Economist, in the last two years propylene price has gone up 150%.

A predictably low price for gas will allow for plants dedicated to propylene production from gas.  At least three companies, Lurgi, Total and UOP, have the technology at an advanced state.  This would make the greatest sense for gas that is otherwise stranded – Prudhoe Bay gas comes to mind.  The gas pipeline from Alaska is no longer viable if shale gas production in the US and Canada continues apace.  Produced gas continues to be reinjected.  The real price for this gas is well below the price in the Lower 48.  The economics of conversion to transport fuel or plastics feed stock is compelling.

Sustained high oil/gas price ratios are predicted.  This will drive a secular shift from oil to gas.

The Post-election Energy Future

December 19, 2010 § Leave a comment

This post is loosely based upon the November 18th RTEC Breakfast Forum topic, Implications of New State and Federal Leadership on Clean Energy Enterprise

The midterm elections produced dramatic shifts in the political balance in Congress and both legislative bodies in North Carolina.  The effect on energy policies can be expected to be significant as job creation will trump climate change.  Conventional energy will be up while ethanol will be down.  A price on carbon, barely possible in the previous regime, will now be off the table.  That will likely put the Integrated Gasification Combined Cycle (IGCC) variant of clean coal on life support.  It will be interesting to see whether son-of-SuperGen in Illinois will survive.

National energy security will move up on the agenda.  Steve Chu and his aggressive research agenda will go under the microscope.  Business friendly policy will be in and energy efficiency should be unaffected.  In the “anybody’s guess” category is the federal subsidy on electric cars.  In North Carolina, oil and gas exploitation will be in.  Wind could be buffeted because of fervent championship by the past administration; hopefully they will rise above that.  These and more are discussed below.

Energy security considerations are likely to lead to encouragement of domestic resource exploitation.  This will entirely be in the province of oil, and to a lesser degree gas.  Replacing imported oil with domestic fuel substitutes will create jobs. The obvious implications will be toward deep-water exploitation related policy.  Also, expect considerable pick up in oil from tight rock, such as the Bakken and Eagle Ford prospects.

Electric vehicles fall in the category of oil replacement.  The current subsidy of $7,500 per vehicle will probably be kept, but the timetable for taper off and elimination will probably accelerate.  General Motors has been reborn and their results, including the post IPO stock price, are healthy.  Their considerable bet on the Volt and the attendant job creation will be a factor.  Some corporations, most notably GE, are doing their bit in this regard.  GE recently committed to purchasing 25,000 electric cars from GM and Nissan by 2015.  Their purpose was to give the manufacturers the certainty to move into mass production.

Biofuels will be a mixed bag.  Drop-in fuels such as alkanes from plant matter will be favored over ethanol, and mixed alcohols will be somewhere between.  This is because of the plug-and-play convenience of drop-ins; nothing different about the engine, the fuel pump or the distribution infrastructure.  A story in the Economist expands on this point.  Alkanes made with sugar as feedstock may be advantaged by the fact that Brazilian sugar has no import tariff.  In fact, there is a good chance that the 50 cents per gallon tariff on Brazilian ethanol will go away, as may the 52 cents subsidy to blenders of corn derived ethanol into gasoline.  In a burst of candor, Al Gore admitted recently that his Senate tie-breaking vote for it was solely for the purpose of being elected.  He now says the subsidy for first generation ethanol, read corn based, must go away.  The new Congress will likely make this happen.  But not any time soon.  The recent Obama compromise on taxes contained an extension of the ethanol subsidies.

Low carbon sources of energy will be disadvantaged by carbon not having a price.  However, the cap and trade system in Europe has not really worked either.  The price has fluctuated and has generally been too low to make much difference.  Consequently, the responsibility will shift to clean energy, making it purely on economic terms.  This is not all bad because if and when carbon emissions carry a penalty, the alternatives will be even more advantaged.

Wind energy from certain sources is already very competitive with coal, especially if externalities relating to the environmental cost are considered.  Help in the form of federal support for research and development could be helpful.  The recent report from the President’s Council of Advisors on Science and Technology suggests major funding initiatives and associated models in revenue generation for this.  But the revenue models are in fact taxes on existing energy units.  While modest in size, the new Congress will likely be opposed unless job creation is pitched as a principal benefit.  Healthy skepticism of federal coffers of this sort will also be an impediment.  The fund created previously by a tax on nuclear energy was not seen as spent wisely.  Even France has gone away from this model.  The French Petroleum Institute (IFP) used to be funded by a tax on vehicle fuel.  Similarly, the Gas Research Institute in Illinois was funded by a tax on natural gas transport.  Both models are now defunct.

In North Carolina, offshore drilling will potentially become permitted but is unlikely to lead to any actual activity because past exploration of the Atlantic coast has not been promising.  Even if allowed, the oil industry will probably invest elsewhere.  Shale gas drilling might find a home in the state.  It is not believed to be as prospective as the Marcellus in Pennsylvania and New York.  But economic accumulations are plausible.  Pennsylvania leaning on regulation to assure environmental security will likely have to be studied and used as a basis for policy.

Many see the new sheriff in town as a blow to sustainable energy goals.  Climate change based policy may well take a back seat. Energy security drivers and energy efficiency measures, however, will have an important impact.  The International Energy Agency has forecast that well over 40% of carbon mitigation will need to come from using less; carbon dioxide sequestration will account for only about 10%.  In conclusion, energy efficiency measures are important and largely unaffected by the political shift.

Afghani Lithium: Much Ado About Perhaps Little

June 15, 2010 § Leave a comment

Afghanis should rejoice that people are discussing Afghani lithium, not opium.  But, based solely on the popularly reported data, initially by the NY Times, there is little reason for celebration.

The original Times story was largely about the mineral finds in general.  An Afghani economy strongly dependent on opium should welcome diversification into minerals.  But the subsequent stories underlined the lithium, including quoting the Pentagon as referring to Afghanistan as the Saudi Arabia of Lithium.  Hyperbole has an honored place in selling copy, and often has a basis in fact.  We went looking for it.  Here is what we found.

The bulk of the underlying data are at least three years old.  The current release by the Pentagon, including General Petraeus’ use of the word “stunning”, is clearly tactical.  The lithium is found as an ore (mixture of oxides) as well as in salt or brine deposits.  We were unable to find the relative distribution of these.  The importance of this is that the cost of extraction from the ore is two to three times more than from brine.  This despite the fact that the ore has more of the stuff, up to 7.5%, compared to a fraction of a percent in brine.  The economic fact renders most ores impractical at this time, even if easily accessible, which this one might not be.  For example, the US imports the vast majority of lithium it uses, despite substantial domestic ore deposits, most of which are in my home state of North Carolina.  The domestic production, such as there is, is from brines.  Lithium from ore is commercially attractive only if there is collateral production of other values, such as potash.  A breakthrough in smelting technology could change all that.  None is known to be in the offing.

Lithium salt deposits are either brine (salty solutions) in lakes, or associated crystalline salt formed from natural evaporation.  These chlorides are relatively easily reacted with soda ash to make lithium carbonate.  This then is the marketed commodity from which all else is made, including metallic lithium.  The reported values of lithium content of Afghani brine is roughly .028%.  This is at the lower end of commercial concentrations.  In other words good, but not great.

Why, then, was lithium singled out from the mineral mix in the story?  It is the key ingredient in batteries for electronic devices today, and for electric vehicle batteries for at least the next twenty years.  All electric vehicles such as the Nissan Leaf will use over 30 Kg of lithium carbonate per vehicle (Hybrids such as the Prius use a tenth of that).  The vast majority of lithium brine deposits are in South America, with nearly half of that in Bolivia.  There is concern about trading oil dependency for lithium dependency.  The questionable stability of the sources is a factor.  This is why a vast new source is seen as news.

Based on the data revealed to date this is much ado about possibly very little.

A case for decision science research in energy

March 16, 2010 § Leave a comment

A sustainable low carbon future is seen by most to center around breakthroughs in technology and the associated economics.  Most of the attention has been on carbon sequestration, biofuels, renewable sources of electricity and the like.  A number of states and countries have instituted policies to make some of these happen.  Many also see electrification of transportation as an avenue to zero emission vehicles and energy security of net oil importing nations.  All of these cause people to make choices, in many cases requiring changes in behavior.  Introducers of technology know that the barrier to wide scale adoption is particularly high when it involves substitution of something familiar.   The science of why people make the decisions they do, especially those involving green alternatives, merits further investigation, if for no other reason than that it may guide product and process development into areas with higher success rates of adoption.  It will undoubtedly be effective in informing on policy.  An example is in the area of solar energy.  If the primary driver for adoption is “seen as being green”, then hiding photo voltaic devices inside shingles would be counterproductive, as also the policy of many neighborhoods to disallow visible displays of solar panels on homes.

The International Energy Agency (IEA) has posited that for any reasonable 2050 targets for atmospheric carbon dioxide nearly 40% of the mitigation has to be from energy efficiency.  Their most recent forecast calls for 57% of carbon mitigation by 2030 as being from energy efficiency (and interestingly only 10% from carbon sequestration).  Undoubtedly this will in large measure be accomplished with engineering designs that provide the same utility for less energy. This has been the case with up to 90% reduction in standby power of household appliances through the simple expedient of low energy power supplies and modified circuitry.  Since standby power constitutes 10% or so of all electricity usage in IEA countries, this is a huge gain.  The Energy Star and similar efforts have produced further results, although some of these fall in a different bucket, that of the same utility at a somewhat greater price.  In the case of compact fluorescent bulbs, the initial price is higher but the life cycle cost is lower.  Now this begins to get into the realm of decision science because the consumer is required to understand and appreciate life cycle costing.  We are firmly in it for cases where the costs are substantially higher, as in the case of hybrid vehicles. Electric cars will get squarely into the behavioral arena from the standpoint of range anxiety, which is roughly defined as the fear of running out of charge.

Electrification of transportation is an RTEC priority because we see it as the fastest route to energy security through making electricity fungible with oil.  Furthermore, well to wheel efficiency of electric cars is about 45% better than that of conventional cars and the tail pipe emissions are zero, although the burden is shifted to the power producer, where it is more tractable.  Consequently, enabling the public’s acceptance of electric cars is an RTEC priority.

Addressing range anxiety and other behaviors falls at least in part in the area of decision science.  Some of it can be addressed with technology.   For example, Nissan’s introduction of the Leaf later this year will be accompanied by features such as remote monitoring of the state of charge of the battery and driver notification, including identification of the nearest charging station.  But in most instances, technical advances only take us so far.  When smart electricity meters are installed in homes, there is high variability in the manner in which the data are used by the homeowner.  Behavioral studies are needed to guide the programs to achieve the best results.  Non price interventions that rely on behavioral proclivities, such as conformance to societal norms, can likely be used to advantage.

In their matrix of program thrusts, DOE’s newly formed unit ARPAe has a matrix element that intersects social science efforts with transportation.  RTEC believes that this could be a fruitful area of pursuit for RTI/Duke/UNC collaboration.  One possible project would combine conventional survey based approaches with behavioral economics ones in addressing the electric car range problem.  At this time this is based on guesswork premised upon beliefs regarding consumer preferences when driving conventional cars.  Statements such as “the consumer expects a range of 300 miles” are rife.  A definitive study of driving distances in metropolitan areas that are initial target of electric vehicle entry could then be used to devise behavioral studies, the results of which could be expected to drive out interventions, both price based and not.  To aid this, the original study would be broken out by age, income and other relevant demographics. Finally, the interventions themselves could be tested on a population.

The foregoing notwithstanding, RTEC believes that the greatest gains for society in the realm of sustainable energy are going to come from simply using less.  Consequently, a major focus will be to encourage and assist members in devising social science based research with this goal in mind.

Electric Car Drivers may need Training Wheels

May 4, 2009 § 1 Comment

Training wheels are a wonderful invention to aid the tot with two wheel transport anxiety.  More often than not the anxiety resides with the parents, but regardless of source, the wheels get installed.  Now, in purely engineering terms, the extra wheels are pedestrian in design.  Clearly intended for the short term, they are not of particularly robust construction, because not much use is anticipated.  The added cost is modest when compared with that of the bicycle.  Yet, the comfort to the psyche is enormous.  Now, all of this really only applies to the munchkins.  Were you to learn to ride a two wheeler at an advanced age, as was I at age 11, the training wheel option is essentially out.  Even if available, the derision of the cohort group would not be sustainable.  So, what does all of this have to do with electric cars?

Electric cars will come in two flavors:  all electric (EV’s) and hybrid electric (PHEV’s), both with the ability to conveniently plug into wall outlets and both utilizing the energy of braking to charge a battery.  Both will use electricity alone to drive the wheels, so there will be an essential simplicity to the mechanics: no transmission, no gear box, no cam shafts and minimal mechanical maintenance.  The essential difference between the two will be the auxiliary gasoline engine in the hybrid electric, that will charge the batteries if they run down.  The all electric will not have this back up feature.  So, it will rely solely on batteries for range.  The early entry vehicles will have an electric range of 40 miles for PHEV’s and 80 to 100 miles for EV’s, not counting boutique cars such as the Tesla.  One can reasonably expect the EV numbers to double within a few years, provided advances are made in battery technology to provide more capacity in the same volume.

The car buying public will face a choice.  Since the EV, when mass produced, could be expected to be cheaper to make, despite the bigger battery, the list price will be lower than that of a PHEV, with one manufacturer expected to offer it at a price comparable to the gasoline counterpart.  The PHEV on the other hand, while more expensive, will have the much greater range afforded by the gasoline back up.  The “fuel” costs will be comparable when run on electricity.  The key difference will be a new term that has entered the transport lexicon: Range Anxiety.  We can roughly define this as the fear of running out of juice without a convenient fill up station.  The PHEV Chevy Volt’s electric range of 40 miles is based on studies indicating this as serving commute needs of 75% of Americans.  A full tank of gasoline extends that range another 600 miles.  The initial entry EV’s will have ranges of 80 to 100 miles and charging times of less than half an hour to six hours for a full charge, depending on the sophistication of the charging equipment.  Home charging, at least initially, will be at the higher ends on time.  Early deployment will be in cities that will install some measure of distributed charging infrastructure.  Battery swap business models are in play, wherein charging stations plan to exchange a fully charged battery for a depleted one.

In the end, the buying public will have some fraction afflicted with Range Anxiety.  This is where PHEV’s play the role of training wheels.  With such a vehicle consumers have the luxury of sorting out their driving habits, their discipline in charging every night, and all other manner of behavior impinging upon their ability to live with the range of an EV, at all times secure in the notion that the gasoline engine can bail them out.  There will also be a segment of the population eschewing this aid to behavior modification, in effect wobbling on to the bike, as your truly did some decades ago.  A skirmish with a thorny bush sticks, as it were, in the memory.  Thorny situations will undoubtedly lie in wait for the first time EV-ers.  And then again, perhaps PHEV’s will always have a place.  Choice is a good thing, in cars, colas and presidential elections.

Can North Carolina be a domestic source for lithium for electric vehicle batteries?

February 14, 2009 § Leave a comment

Making transport fuel fungible with electricity offers options to net importers of oil such as the US.  As a state, North Carolina is in the unenviable position of importing all of its fuel from other states.  While biofuel will undoubtedly play a role in reducing this import, electrifying the fleet offers another avenue.  The primary mission of electric vehicles(EV’s) would be the reduction or elimination of tail pipe emissions, the notoriously most difficult site for carbon dioxide capture, although a secondary one may be to act as a storage medium for the grid.  The FRDM program, led by NC State University, targets creating all elements of a Smart Grid, which would be a key vehicle in grid optimization.  So, North Carolina is already well placed to take a lead in electrifying the passenger vehicle fleet.

EV’s such as GM’s Plug-in Hybrid (PHEV), the Volt, scheduled to be marketed in 2010, are intended to be charged in conventional electrical outlets, with a gasoline engine for charging the batteries if needed to go beyond the nominal range, 40 miles in the case of the Volt.  Pure EV’s, running solely on electricity, such as one scheduled by Nissan for limited entry in 2010, are also likely to be part of the equation.  If such vehicles are to become a substantial portion of the passenger vehicle fleet, several economic hurdles will have to be crossed, some possibly needing subsidies.  The principal of these is the expected higher cost of the vehicle (pure EV’s, because of their simplicity of design, will be somewhat lower in cost than PHEV’s), driven largely by the cost of the battery.  Research to reduce cost and increase range is ongoing in this and other countries, and the current administration has announced the intent to significantly fund this endeavor as part of the Stimulus Package.

Batteries: The Lithium Ion battery is the clear leader in this field and many believe it will continue to be so for the foreseeable future.  Other manner of sophistication, such as augmentation with super capacitors for short  bursts of power, is expected to reduce the load on the batteries.  However, the current unit costs are high, although high volume throughput has not yet been in place.  One can expect the costs to come down over time.  A point of note is that while the technology is domestic in many cases, all battery manufacture is currently in other low labor cost countries.  However, as in the case of foreign designed cars, domestic manufacture may become feasible.  Location of such capability in North Carolina would go hand in hand with any decision to make North Carolina a primary launch state for electric vehicles.

Lithium: A more pernicious issue is the sourcing of the critical commodity, Lithium.  World reserves are considerable, but the majority of these are in Latin America, including some countries such as Bolivia who are not in close alignment with the US.  There is the risk of trading foreign dependency of one commodity for another.  Unlike the battery manufacturing situation, a mineral is uniquely situated, as in the case oil.  North America does have sizeable reserves of lithium ore, in the form of spodumene, an oxide, but with current technology the processing costs are high when compared to the cost of processing the brine based deposits in other countries.  The vast majority of spodumene reserves in this country are in North Carolina, in an area northwest of Charlotte.

Call for Action: The technology for spodumene processing deemed non economic is at least half a century old.  Hints exist in the literature for more innovative methods.  In the national interest a research program should be instituted to investigate the possibility of economic recovery of Lithium from oxide ore.  RTEC has commenced a scoping exercise in this area, currently involving a literature search, but a fully fledged investigation will require State or Federal funding.

Flexi-Fuel Fairy Tale

December 11, 2008 § Leave a comment

The Utopian State, known the world over as the US, was in the throes of a dilemma.  Much maligned for not doing enough to limit carbon dioxide emissions, it developed a plan that seemingly in one fell swoop tackled global warming associated with automobile emissions while at the same time reducing import of oil from nations, some of whom were deemed unfriendly, at least in the rhetoric of elections.

This solution was known as the 20/10 plan.  The goal, to replace 20 percent of gasoline with ethanol in 10 years, was seen as visionary, if for no other reason as that 20/10 was about as good as one got with vision.  However, even before vast quantities of alcohol had been consumed, a hangover of major proportions was in the making.  Therein lies the tale.

The Utopian State, as befitted its name, was inclined to believe that the public would recognize a really good thing when they saw it.  They especially believed in the maxim: If You Build it, They Will Come, because said maxim was irresistibly derived from the powerful combination of Kevin Costner, the National Sport and mysticism.

So they built it, a complex web of subsidies to farmers, automobile companies and refiners, and tariffs on imported ethanol, all designed to produce domestic ethanol to blend with gasoline, and vehicles that would run on the stuff.  In a nod to perceived consumer preferences, they incentivized the auto companies to make flexi-fuel cars, capable of using regular gasoline and also E85, a blend with 85% ethanol.

They even created demand for these cars by ordering their agencies to use them and mandating the use of the new fuel.  Waivers to the mandate were given generously, no doubt in the Utopian belief that said waivers would not be sought if not merited.  It seems that some of these outfits are seeing a net increase in gasoline usage (Washington Post: Problems Plague U.S Flex-Fuel Fleet, Oct. 23, 2008), a result contributing in no small measure to the aforementioned hangover.

At the core of Utopian belief is that folks will “do the right thing.”  So, purchasers of flexi-fuel vehicles were expected to purchase E85, even from filling stations some distance away, ignoring the fuel consumption getting there and back.  Then word filtered through that E85 delivered 28 percent fewer miles per gallon.  In short, it was more expensive to use and harder to find.  They started filling up with regular gasoline because the flexi-fuel vehicle allowed that; filling stations noted the drop in volume and stopped stocking E85.

In time, it became apparent that the federal policy and legislation underestimated, or ignored, the fact that even in the US only market-based policies function.  Into this nightmare scenario stepped in Prof. Wunderbahr from a prestigious eastern university, with an engine design that delivered a small car running  on E85, delivering fuel economy and the muscle of a larger vehicle.  The design took advantage of the high octane number of ethanol (113 versus 87 for regular gasoline), which allowed effectively high compression ratios, which in turn improved the efficiency of combustion.  The result was elimination of the gas mileage penalty from using ethanol, increased power for an engine of given size, and retention of the improved emissions associated with ethanol usage.

Auto makers vied with each other to retool and produce these cars without any federal incentive because the public actually wanted them.  Fuel distributors rushed to install E85 pumps and realized that this was simply achieved by eliminating one grade of fuel.  They came to the realization that all vehicles on the road today specify either 87 or 91 octane.  A third grade was not needed, and the third pump was now available with modification to dispense E85.  The US government, not wanting to be left out of this, set policies to further these steps.  Ethanol from sources non competitive with agriculture became cheaply available.  All was well again.

And then they elected a new President who resolved never again to set policy that was not market-based.  The country united behind him on this and it was never quite the same again.  The country was henceforth known as the United States.

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